Despite the recent downturn of the global economy, the private equity (PE) sector in Japan presents flourishing optimism towards a bright future. Global private equity investors reduced the pace of new commitments for the past years, causing a slowdown in fundraising.
However, PE along with venture capital (VC) spaces in Japan have been buoyant in recent times. The sector is indicated to grow and also attract increasing investment, both domestic and overseas.
Recently, around 13 Japan-based private equity in Q1 2019 has secured an aggregate JPY 221 billion, presenting almost four times more capital than in Q1 2018. These early indications show that new fundraising records could well be ahead in the Japanese market.
The previous data from Private Equity International also recorded that Japan-focused PE funds raised over 15 times the amounts garnered in 2016. The data showed that 100% of Japan-based funds met or even exceeded their target in the period, including NSSK (raised USD 532 million), Advantage Partners (JPY 60 billion) and J-Star (USD 270 million). Domestic PE deal volume also increased substantially year on year.
Furthermore, the country is seeing a massive growth of 30% more funds closed in Japan over the same period. Japanese startups also raised approximately USD 2.5 billion, 4.5 times the amount raised in 2012. Meanwhile, corporate venture spending in Japan reached a record JPY 70.9 billion in that year, almost 60 times greater than the investment levels in 2011.
As for outside the country’s border, outbound PE investment by Japanese managers also witnessed a large bump in 2017, rising by around 28% in the number of deals and 46% in deal value.
Decreasing Barriers to Deals
Barriers to deals in Japan are gradually falling, as traditional cross-shareholder arrangements being substantially unwound, along with the adoption and additional improvement of statutory squeeze-out and tax-free spin-off mechanisms.
A set of principles voluntarily adopted by institutional investors listed in 2017 revisions to the Financial Services Agency-sponsored Stewardship Code, actively encouraged the divestiture of non-core assets by expressly citing the need to enhance medium- to long-term corporate value as well as encouraging institutional investors to collaborate as needed. The government is also driving toward an increasingly open attitude towards foreign capital through enhanced corporate governance and shareholder returns.
Adding to that, the shift in attitude has been the main force fuelling the robust fundraising market in the country. PE vehicles were once said to swoop in on financially distressed businesses and flip them for sheer profits. Now, however, they seem to have shed this old perception in the industry, as PE funds have been instrumental to improve corporate productivity and to facilitate business succession in Japan.
Deals & Market Remain Challenging
While the environment for foreign PE buyers in Japan has improved considerably and Japan’s conglomerates are encouraged to divest non-core assets, they should be aware that significant and target-specific challenges still remain.
It is often the case that the business being sold will simply be a division of the seller that needs first to be carved out. The parent will often hold key assets even if the target is held in a subsidiary.
Beyond key assets, substantial dependencies will also typically exist between the seller and the business, where detaching those businesses will require attention. Many Japanese conglomerates are not structured to facilitate selling entities or groups of assets, presenting significant difficulties for deal teams.
Some of the same dependencies may still exist, although the business being sold is a listed subsidiary. The target’s board will most likely seek to comply with the Ministry of Economy, Trade, as well as Industry’s new Fair M&A Guidelines, using a special committee of independent directors. This may seek to assert its independence by imposing its own pricing or other requirements in approving the sale.
Moreover, some sectors still present stumbling blocks for overseas buyers, despite an increasing government’s and market’s open attitude. For instance, acquisitions in several sectors, including transport, telecommunications, energy, broadcasting, and software, are subject to substantial government involvement.
The cultural issues that have traditionally occurred in cross-border M&A transactions for Japanese assets also continue to challenge private equity buyers. Firms are required to prepare for atypical requests that can be challenging for buyout firms to accommodate.